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Wed 20 May 2009 07:51 AM

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Crisis forces Saudi gov't to foot bill for projects

Private sector funding, local bank loans have dried up leaving gov't to fund schemes.  

Saudi Arabia's crisis-hit banking sector has choked off finance for major projects, forcing the government to step in to foot the bill, experts told an international conference on Tuesday."We have not seen major financing of (private) projects last quarter and this quarter (of 2009)," Abdullah Dabbagh, president of the Ma'aden mining group, said.

"It's a really serious issue for some of these projects," he told the Euromoney Saudi Arabia Conference in Riyadh.

The government last year took over financing of the multi-billion-dollar Mecca-Medina high-speed railway amid failure to find private funding for the project, said Yahya Al Yahya, chief executive of Gulf International Bank.

The $5.5bn dollar Ras al Zour water and power generation project could face the same fate, after the original bid winners failed to come up with their own financing, Yahya told the conference.

"The international banks have largely withdrawn from the market," said Brad Bourland, chief economist at Jadwa Investment.

And while local banks are in better shape than their foreign counterparts, they do not have the capacity to fund multi-billion-dollar projects, he said.

Before the outbreak of the global financial crisis, Saudi Arabia had mapped out a large list of ambitious new economic cities, petrochemical plants, railways, ports, power and water projects for private investment.

But many of them have failed to take off due to the global downturn.

The government is already spending heavily to boost growth and the economy will likely expand slightly this year despite a 10 percent contraction in the oil sector due to curtailed output and exports, Bourland said.

The government budgeted a 36 percent increase in investment spending for 2009 over 2008 to forestall the effects of the global economic downturn, Finance Minister Abdul Aziz Al Assaf told the conference.

Projects approved by the government in the first quarter of 2009, valued at SR40bn ($10.7bn), were more than double the same period last year, Assaf said.

But bankers are worried that government financing will not be enough for projects which were initially designed for private sector finance.

"The real challenge going forward... will be to create the necessary capital market funding" for such projects, Yahya said.